Index provider Dow Jones has teamed up with research firm Parala to launch an index that combines global equity market sectors according to a proprietary asset allocation model.

The Dow Jones Parala Global Macro Sector Allocation index takes as its starting point the Dow Jones Sector Titans index, which classifies global equities into 19 “supersectors”, according to the widely used Industry Classification Benchmark (ICB).

The capitalisation-based weightings of this index are then varied according to a sector allocation model developed by Parala. This asset allocation model includes as inputs both equity “beta” risks such as momentum, style and size, as well as macroeconomic factors such as global interest rates, credit spreads, dividend yields, commodity prices and inflation.

The nine sectors ranking lowest are then underweighted by progressively larger amounts with respect to the capitalisation-weighted starting point, while the nine sectors with the highest rankings in Parala’s model are then overweighted in the same way. The index is rebalanced quarterly.

Parala says its model has produced an average annual return of 7.44 percent a year over a 15-year period, based on a back test, compared with a return of 4.7% per annum from the capitalisation-weighted Sector Titans composite benchmark. During recent years the index’s internal turnover was just over 50 percent a year (not including turnover at the underlying sector index level).

The index is designed for use both in tracker funds and products and to underlie separate managed accounts, said Jamie Farmer, executive director at Dow Jones Indexes.

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